Sydney

The office market recovery accelerates in Q1 2011

Tenant demand continues to rise in all major markets. The overall CBD vacancy rate fell to 7.4% in Q1 2011 from 7.9% in Q4 2010.

AUSTRALIA, 13 APRIL 2011 – March quarter statistics released by Jones Lang LaSalle Research have revealed office market conditions strengthened in the first quarter of 2011.

Jones Lang LaSalle’s Head of Research for Australasia, Dr. David Rees said, “The recovery in the office sector is now well under way and demand strengthened further in Q1 2011.

Market conditions are becoming increasingly tight at a very early stage in the current upturn. Perth continued its outstanding run with the vacancy rate declining to 5.6% in Q1 2011 from 7.3% in Q4 2010, reflecting increased demand from the resource sector. Among the major markets only Canberra recorded a rise in vacancy in the quarter from 12.2% to 12.6% and is yet to show signs of a turnaround.”

Across CBD office markets, positive net absorption of 83,700 sqm was recorded in Q1, following a very strong 447,000 sqm recorded during 2010 (86% above the ten-year average figure). As a result, the national CBD office market vacancy rate fell to 7.4% in Q1 2011, from 7.9% in Q4 2010.

“The recovery story was further consolidated in the March quarter. However, further increases in net absorption may be limited by capacity constraints in the labour market and a shortage of office space. Even in Brisbane, the CBD vacancy rate declined in the March quarter, showing that the recent natural disasters are proving to be a transient shock to the long-term recovery profile,” Dr. Rees said.

The forward indicators of leasing demand remain positive. Business confidence has improved, job advertisements continue to rise and leasing enquiry levels remain strong across most capital cities. The national unemployment rate declined to just 4.9% with 32,100 additional full-time jobs (seasonally adjusted) recorded in March. There was a strong rise in white collar employment in the three months to February 2011 (up 2.7% over the three months prior) which is likely to provide a further boost to net absorption in the short term.

The strength in the labour market is further emphasised by the amount of space available for sub-lease. During the March quarter, sub-lease availability across the national CBD office markets fell by over 40,000 sqm and now accounts for only 0.7% of total stock.

On the supply side, just five small projects totalling 19,800 sqm completed across the country in Q1 2011. The largest of these projects was 7-9 Irvine Place, in Norwest Business Park, NSW (13,200 sqm). Three small projects also completed in Canberra (5,400 sqm) where a large supply pipeline continues to hold the overall vacancy rates in double digits. Across other Australian CBD office markets, supply continues to decrease. Just 354,300 sqm is due to complete in 2011, compared with 506,900 sqm in 2010.

Jones Lang LaSalle’s National Head of Office Leasing, Kevin George said, “Market conditions are becoming increasingly tight in some cities, particularly in Melbourne, Perth and Adelaide CBD’s. Availability of prime contiguous space is now becoming an issue for major tenants in these markets and pent-up demand is building. We expect to see the growth in demand being reflected in pre-commitment activity as a result.”

“The recovery in Perth has been fast and in line with our expectations. Strong demand from the mining and resources sector has driven the majority of tenant demand in Perth. In the March quarter Fortescue Metals, BHP Billiton, Rio Tinto and Argyle Diamonds all leased additional space. Net absorption was 24,600 sqm and the vacancy rate dropped to just 5.6% from 7.3% three months earlier. Perth CBD now has the lowest vacancy rate of all Australian capital cities, surpassing Melbourne CBD,” said Mr George.

Melbourne CBD continues to strengthen and recorded 24,700 sqm of net absorption in the first quarter resulting in a 0.6% decline in the total vacancy rate to 5.7% in March from 6.3% in December. Prime gross effective rents continue their upward trend, rising 1.2% in Q1 and 4.8% year on year.

“The most disappointing market has been Sydney in terms of the pace of recovery. It is still lagging Melbourne and the booming resource states and there hasn’t been a genuine demand impetus yet,” said Mr George.

Jones Lang LaSalle’s Head of Leasing NSW, Tim O’Connor, said “Leasing activity and enquiry levels in Sydney CBD increased over the first quarter of 2011 with interest focusing on relocations as tenants continue to explore opportunities to upgrade. There remains an element of cautiousness amongst major tenants resulting in leasing transactions taking longer to conclude. Nevertheless, 22,000 sqm of net absorption was recorded in Q1 which led to a decline in the total vacancy rate to 7.3% (down 0.6% from December). A turnaround in finance and insurance sector employment in the three months to February (+8.4%) is a positive sign for leasing demand in Sydney CBD, which has been patchy during the early stages of the recovery.”

Q1 2011 was the turning point for prime gross effective rents in Brisbane CBD which rose 1.2% in the three months to March. The vacancy rate peaked at 10.6% in Q2 2010 and has since fallen to 7.9%. Conditions in Brisbane CBD continue to firm and demand from a range of sectors is improving, particularly the mining sector and services to mining. Supply additions over the remainder of 2011 and 2012 will provide some respite from the steady tightening of market conditions in the Brisbane CBD market.

Leasing activity was reasonably strong in Adelaide in Q1 2011 but major tenants were either relocating or consolidating. Net absorption was 4,700 sqm and vacancy declined to 6.9% (down 0.4% from December).

Market conditions in Canberra remain soft. The vacancy rate continues to rise and net absorption was marginally negative (-1,400 sqm). Few leasing transactions were recorded over the quarter and an on-going supply pipeline means vacancy will likely remain high at least through 2011.

“The Australian economy has historically had a strong relationship with the performance of the office market. The RBA anticipates above trend GDP growth in 2011 and 2012. This indicates a sustained recovery in the office sector.

"Market conditions will continue to strengthen as companies continue to increase head count and seek to improve the quality of their office accommodation.

“Diminishing availability of prime grade office space is expected to support an upturn in rents across most office markets through 2011,” concluded Mr George.